Software Index
State of the Market
On September 18th, the Federal Reserve announced a 50-basis-points-cut to the target federal funds rate, which was at its highest rate in more than 20 years as the Fed sought to bring down inflation. This rate cut, the first in 4 years, signals a shift in concern from inflation to maximizing employment.
This isolated rate cut may have a minor effect on software company valuations; however, future long-term monetary policy and general economic outlook will likely be more impactful. Fed chair Jerome Powell indicated that further rate cuts are coming, albeit at a slower pace, and that the central bank will not target the ultra-low interest rates that fueled SAAS valuations from 2018 to 2022. Moreover, the Fed slightly lowered GDP growth forecasts for the year, and consumer confidence remains mixed after years of high prices and concerns about unemployment.
August Consumer Price Index (CPI) results showed an increase of 0.2%. On a 12-month basis, the CPI decreased to 2.5% in August, down from 2.9% in July. Although this rate exceeds the Fed's 2.0% target, 2.5% is the lowest annual inflation mark since February 2021.
The Bureau of Labor Statistics (BLS) reported that total nonfarm payroll employment increased by 142,000 in August, below the consensus forecast of 160,000. The unemployment rate edged down month over month from 4.3% to 4.2%. While the construction and healthcare sectors saw job gains, IT and business services showed little change.
Global economic news, corporate earnings, and interest rate expectations combined to make August a particularly volatile month for software valuations. The Scalar Software Index's median next-twelve-months (NTM) revenue multiple dropped 2.9% to 4.6x, while the top-10 NTM revenue multiple increased 7.1% to 14.4x.
Median
NTM Rev Multiple
4.6x
Median
NTM Rev Growth
11.3%
Median
Gross Margin
75.4%
Top 10*
NTM Rev Multiple
14.4x
Top 10*
NTM Rev Growth
21.3%
Top 10*
Gross Margin
76.6%
*Median multiple, growth rate, and gross margin for the top 10 companies based on EV/NTM Revenue.
Valuation Trends
Index Leaders
Top 10 companies in the Software Index based on current EV / NTM Revenue Multiple.
Multiples by Growth Tranche
Valuation multiples are strongly correlated to expected growth. Scalar has selected the tranches based on current market conditions.
EV/NTM Revenue Multiple
High Growth (> 25%)
9.7x
Multiple | Growth |
|---|
EV/NTM Revenue Multiple
Average Growth (15%-25%)
7.6x
Multiple | Growth |
|---|
EV/NTM Revenue Multiple
Low Growth (< 15%)
3.9x
Multiple | Growth |
|---|
EV/NTM Revenue Multiple - Top Quartile
NTM Revenue Multiple and NTM Growth Rate for the top quartile of companies in the Scalar Software Index, ordered by NTM Growth Rate.
Pre- & Post- Money Deals
Averages for the trailing 6 months of successful software and SAAS fundraising, including rounds Series A through Series D.
Average
Deal Size
Average
Pre-Money Valuation
Average
Post-Money Valuation
The data for the Scalar Software Index is collected based on market data on the last trading day of the previous month.
Metric definitions:
- EV/NTM Rev: Enterprise value to next twelve months revenue.
- EV $MM: Enterprise value, calculated as the market value of equity plus net debt and minority interest, in millions of USD.
- LTM Rev $MM: The last twelve months revenue in millions of USD.
- NTM Rev Growth: The expected growth rate of revenue for the next twelve months.
- LTM Rev Growth: The growth rate of revenue over the last twelve months.
- Gross Margin: The percentage calculated from gross profit over revenue.
- Operating Margin: The percentage calculated from operating income (EBIT) over revenue.
- FCF Margin: The percentage calculated from unlevered free cash flow over revenue.
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Data Sources: S&P Global Market Intelligence and PitchBook Data, Inc.
Enterprise Software Operating Metrics provided by Public Comps.
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